What qualifies a person as a day trader?

By Investopedia Staff AAA
A:

As of Sept 28, 2001, the NASD (now, FINRA) and NYSE amended their definitions of day traders. A new term that they use is "pattern day trader". An investor can be classified as a pattern day trader by having one of the two following characteristics:

  1. He or she trades four or more times during a five-day span, or
  2. The firm where the investor is making transactions, or opening up a new account, reasonably considers him or her a day trader

Once an investor is considered a day trader, the brokerage must classify him or her as such, and the investor is then subject to increased equity requirements. Mainly, the brokerage must require a minimum equity of $25,000 at the beginning of the customer's trading day. This minimum equity requirement has been introduced by the Securities & Exchange Commission and the NYSE. Ensuring that any substantial losses can be offset by the day trader's own equity, the requirement addresses the inherent risk imposed on brokerages by leveraged day trading activities.

A more restrictive margin rule has also been implemented. Day traders are permitted to purchase only four times their maintenance margin levels. If this level is exceeded, the firm must issue a margin call to the day trader who subsequently has five business days to deposit the funds before the account is halted from additional trading.

For further information, see our articles Defining Active Trading and Day Trading: An Introduction.

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